Monday, August 18, 2014

If you have been involved in a real estate transaction within the past two years or so, you probably have heard the term due diligence. Prior to that, you may even have the mental acumen to remember repair request periods in our old contracts. Most folks who aren't in the real estate industry (and some who are) don't really know or take the time to understand the differences, challenges and advantages between the two.

First, due diligence is a time period. One agreed upon by buyer and seller, not agent and agent. During this period for an agreed upon amount of non-refundable money, (again, agreed upon by buyer and seller), the buyer has the opportunity to inspect, think about, mull, brood or whatever he or she wants to do in order to determine that it is the right property for them. The seller must, during this period, make the home available to the buyer to investigate. That does not mean that it should be a revolving door of inspections and visits or late-night stalking, but it does mean that the buyer should have reasonable access to have inspectors, surveyors, etc. out to the property.

During this period, not only are inspections made, but it is up to the buyer to make sure they can obtain financing. There is no longer a financing contingency. This period is it. Not only should a buyer have full loan approval prior to the period ending, but this means that the appraisal is complete and satisfactory, the cost of insurance is satisfactory and that any and all info you might want on restrictive covenants, HOAs, etc. is obtained. Now the list above is NOT all-inclusive. If you want to see if there are sex offenders, ghosts, take soil samples, check flight patterns, lights from stadiums, noise from trains or anything else you can dream up...this is the time to do it! If for any reason, something doesn't suit your fancy and you just can't live with it or the seller can't fix it, you can get out of your contract and only forfeit your due diligence money.

That's right!! During this period the buyer can "walk" from the property for any reason or no reason whatsoever. This means that the negotiated amount of money put down for the negotiated period of time needs to make sense for buyer and seller. Again, all of this is negotiable.

Before you think that this favors the buyer or seller, one over the other let's look at some scenarios.

A) If the buyer is getting a 100% loan, then they may not have a lot of "extra" cash laying around to bring to the table for due diligence, so maybe the time period is shorter to investigate the property. The buyer and seller could ask that the inspections to be performed in the first week or two so that anything unusual in the "typical" inspections could be addressed. The period of time could still allow for full loan approval which usually takes a little longer than two weeks BUT the buyer now has "skin in the game" since they are out of pocket with the cost of inspections, which on the low side would be $400+.

As the buyer has more of their own money, the likelihood they walk away for something petty, is typically decreased. By the time the buyer has the minimum inspection, appraisal and survey, they are in well over $1000. Usually, it is not easy to walk away from that amount knowing that you are going to have the same out-of-pocket expenses on the next home you purchase.

B) Let's say a buyer is looking at house that has just come on the market and it is HOT! The buyer knows they need to get their financial ducks in a row, because they weren't even planning on buying this soon. If they can get the seller to accept their offer, they can use the due diligence period to get their loan in place but the seller is skeptical to take the home off the market for these buyers knowing they are not quite ready to close. The buyer in this situation may offer the seller a larger due diligence amount, showing that they are serious, knowing that the house is in good shape and is desirable to other buyers. Their money may be non-refundable, but they also know it's a credit to them at closing and they love the house and intend on buying it barring something major. This also, provides a little cash to the seller in the event something does come up during the inspections that needs correcting.

The due diligence period is also the time to negotiate repairs. If the buyer and seller cannot come to terms during the due diligence period as to what will and will not be repaired, the buyer can terminate the contract. Usually, buyer and seller do come to terms and there is a give and take. This is an appropriate place to note that repairs do not have to be completed before the end of the due diligence period, only before closing and with adequate time for the buyer to re-inspect the repairs to confirm quality of workmanship.

Due diligence is a great tool that works for both buyers and sellers as they navigate the purchase of real estate. If you have questions about the process, would like more information on local real estate or need a first-hand referral to an agent in our worldwide network, don't hesitate to reach out to me via email, phone or text.